One of the decisions you as an investor will make when you own an apartment building is whether or not to advertise the apartments as "all bills paid". In an All Bills Paid apartment building, there's only one bill for each tenant that includes their rent and all utilities. That means that you as the owner are responsible for taking care of the utilities. What are the pros and cons of this scenario?
Pros
Easier to Rent. "All Bills Paid" apartments are easier to rent because tenants like the convenience of not having to worry about utility bills. They're also easier to rent because the tenants don't have to come up with a credit check or a deposit for the utility companies.
Simplified Accounting. The owner only pays one check each month to the utilities company for the entire building.
Potential to Increase NOI. If you calculate conservatively on utilities usage, you could potentially increase your NOI (net operating income) with "All Bills Paid". If you're charging $150 on top of rent for utilities but utilities actually cost you $100, you have increased your NOI.
Cons
Could be Costly to the Owner. When tenants aren't monitoring their own utility bills, they're less judicious about conserving energy. If electricity is free, they won't worry about leaving the air conditioning on while they're away for the day. Meanwhile, the building's electricity usage is climbing, and the owner will end up footing the bill.
Friction Among Tenants. If you have to raise rents because utilities prices have increased, some tenants may complain that they have been conserving energy while other tenants have been wasting it. Usually, the tenants will work this out among themselves, but the property manager will likely hear about it.
Considerations
If you are concerned that an increase in utility charges or excessive usage by the tenants will hurt your bottom line, you could add a clause to the contract that says if the utility bill exceeds a certain amount, the property manager reserves the right to bill back the tenant. This will help tenants to be aware of how much energy they use.
If your building is set up with a single electricity meter, you can put on monitor on the individual units to measure usage. You can outsource this service to a company that will monitor usage every month. This can be helpful in determining which tenants are overusing the utilities.
"All Bills Paid" apartment buildings are typically Class C buildings. If you own an older building and wish to simplify your accounting, attract new tenants, and potentially increase your net operating income, consider converting to "All Bills Paid".
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